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Ireland: Globalization’s poster child

Ireland remains the strongest performer in a resurgent EU economy, with annual output up 5.8 percent in the second quarter of 2017. The strength of the performance is all the more remarkable given the unique extent of the exposure Ireland has to the Brexit process. Brexit effects are already impacting upon the Irish economy as a result of the rapid depreciation of the pound against the euro, and the falling purchasing power of U.K. households has already resulted in slower exports for Ireland from tourism and agri-food sales.

It is no exaggeration to say that globalization is part of the Irish DNA, and the “Double Helix” the country is grappling with currently relates to the positive and negative effects that both corporate migration and Brexit present.

Danny McCoy, CEO, Ibec

Growth, however, continues to be propelled by Ireland’s role as a global trading hub. These countervailing forces reflect the open nature of Ireland, which has been ranked as the world’s most globalized nation. The transformation of the country is reflected in recent Census figures which report that 17 percent of the population were born outside of the country; the fact that trade — as measured by combined exports and imports — is 216 percent of GDP; that foreign direct investment levels per capita are among the top five countries in the world and that business migration looks set to have doubled in a half-decade, propelled by the OECD corporate tax process. It is no exaggeration to say that globalization is part of the Irish DNA, and the “Double Helix” the country is grappling with currently relates to the positive and negative effects that both corporate migration and Brexit present.

The expansion of business migration in 2015 alone was an increase of 40 percent that gave rise to an extraction of activity that propelled Irish GDP growth to 34 percent in cash terms and boosted corporate tax revenue by 47 percent. This is equivalent to a modern-day resource find, in this case with intellectual capital or intangible assets, which brings with it opportunities to transform the national growth potential through increased infrastructure investment; whilst in the short term increases competitiveness pressures as costs continue to rise from a lack of supply. The latter is most acute in housing stock for Ireland, where the speed of supply cannot keep up with the speed of current demands. The population of Ireland is rising significantly, yet building has not returned to the levels seen before the international financial crisis of more than a decade ago. The housing shortage problem is somewhat ironic given that some prominent commentators forecast that Ireland would need to knock down housing stock in order to deal with perceived oversupply.

The speculation on EU consolidated common corporate tax changes are unhelpful and ultimately “King Kanute” like in their effectiveness.

The positives outweigh the negatives from the corporate migration trend, but this requires moving the policy mind-set from one of austerity to one of expansiveness. It also requires greater innovation in adapting to the constraints of EU fiscal rules by greater participation in public-private partnerships. The extension of the Juncker investment plan and the role of the European Investment Bank should greatly help Ireland to maximize the opportunity. By far the greatest competitor for Ireland in attracting international business migration has been the U.K.. In the context of Brexit, a win for Ireland is a win for the EU in the future. The EU-27 needs to allow countries to compete, fairly but aggressively. The speculation on EU consolidated common corporate tax changes are unhelpful and ultimately “King Kanute” like in their effectiveness.

Brexit is not without positives for Ireland in the race for corporate investment, and Dublin in particular, is seen as a serious contender for financial institutional migration from the U.K.. Overall, however, the impact of Brexit on Ireland is likely to be negative. Trade with the U.K., which accounts for nearly 80 percent for small and medium enterprises exports, is crucial for the indigenous business community. Many of these companies are engaged in low margin, high volume trade, which is very sensitive to sharp exchange rate movements, as have already occurred. The Irish labor market is heavily correlated with the U.K. labor market, such that any significant downturn in the U.K. economy will be promulgated through that channel also. In the case of a hard Brexit, Ireland will need to diversify away from the U.K. more significantly, but this will neither be costless, nor immediate.

Ibec, which represents Irish business in all its forms, see the opportunities from globalization continuing to dominate the short-term frictional costs. The length of the transition period offered to the U.K. in Brexit discussions will also be important. Indeed, discussions on the future of a multi-speed EU should be advanced to show a path for greater future U.K. participation within the Single Market and customs union. It is the desire of Irish business to have the U.K. as a partner, not just a competitor.